Smart Risk Taking for Real Estate Investors
There’s no getting around facing risk in life – and real estate.
Whether you’re risk adverse or a risk lover, the best way to approach risky business situations isn’t to jump, guns a blazin’.
Being prepared to take risks SMARTLY is half the battle
Your BIGGEST DANGER as captain is failing to educate yourself and failing to ask for help. Know the seas you navigate, and rely on your crew (your tribe!) to pull you away from shipwreck.
Our latest episode helps you get in touch with your “rings of risk” and evaluate whether YOU are taking the RIGHT risks, the right way.
In this edition of The Real Estate Guys™ radio show, you’ll hear from:
- Your risk-taking host, Robert Helms
- His deal-making co-host, Russell Gray
- Our always-honored guest, the Godfather of Real Estate, Bob Helms
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Discover the three rings of risk
Before you take ANY risks at all, you need to evaluate your personal investment philosophy.
Having a personal investment philosophy doesn’t mean all the investments you make will fit in one box.
The investments in your personal portfolio should fit into three rings of risk:
- a conservative base
- a slightly riskier but still cautious second ring, and
- a high-risk outer ring
In your core set of investments, you DON’T want to take much risk. For example, you don’t want to risk losing your own house or the money from your kids’ college funds.
Determine your starting place. How much money do you need to have on hand for personal living expenses in case something goes wrong? Three months’ worth? A year? Are you comfortable having a mortgage on your primary residence, or should that be investment be loan-free?
In the next ring, you can start taking a little more risk and using a little more leverage.
If you lose some money in, say, your core real estate investments, it should be disappointing, but not devastating.
Once you’ve made some solid investments and see cash flow, consider jumping to the outer ring. To operate in this ring, you have to be okay with losing 100% of the cash you put up.
You can do this because those losses shouldn’t touch your personal funds AT ALL.
You have a ring of security between your high-risk investments and your personal possessions.
Ask yourself: What degree of risk is reasonable for me and my family? Before I make this investment, what else could I do with this money? With what risks? Am I prepared for every possibility? What will happen if everything goes according to plan? What will happen if something goes wrong?
Taking smart risks
Here’s a question for you to consider. Which is riskier: to buy a plot and build from the ground up, or to buy an existing building?
We asked this question to some of the investors and got a wide variety of answers.
The truth is, there’s no right or wrong answer in this scenario. Either choice takes on different kinds of risk.
Everything you do as a real estate investor involves risk. The goal isn’t to AVOID risk. It’s to be smart about the risks you take.
A KEY part of being a smart risk taker is investing in things you understand and have a degree of control over.
If you can’t do your due diligence on an investment because you don’t even know where to start, that’s probably a BAD investment.
To be a smart investor, you have to be self-aware.
Taking smart risks isn’t just about the inherent risk in a property. It’s about YOU and how much YOU can handle.
Also keep in mind that sometimes saying “yes” to the good can cost you the great.
Don’t be afraid to say no.
Ask yourself: Where am I in my life? What are my needs? My capabilities? My ability to engage on this project? My knowledge? Is my team up to par?
Balancing the investor emotions scale
We’ve established that risk is omnipresent in real estate investing. You can’t make a real estate investment without some degree of risk.
To take smart risks, you need to weigh the upsides and the downsides of a potential investment, then make an educated risk assessment.
You also need to think about your own emotional makeup.
Investor emotions run on a scale from greed to fear. In between is rationality.
To be a smart investor, you have to find your own middle ground of rationality.
How do you handle uncertainty? If your answer is close to “not well,” perhaps smart investments for you would have more predictable outcomes and a high degree of control.
But leaning too heavily toward the fear side of the scale won’t get you anywhere.
If your goal is to make money, you have no chance if you don’t make a deal.
On the other hand, tipping too much towards greed can turn making deals into personal badges of honor.
When you have your eye on the prize, it’s easy to lose sight of rationality.
Whether you’re too afraid or too greedy, letting your emotions run high impacts how you behave, which impacts your decisions, which ultimately impacts your bottom line.
Smart investors have tight control over their emotions.
They strive to always operate in a zone of low emotions and high intelligence.
When a deal comes, these investors are the ones who make good, pragmatic, and well-informed decisions.
Ask yourself: Can I stay composed about this investment? How do I handle uncertainty? Do I get carried away when I’m making a deal? Can I evaluate this decision rationally instead of emotionally?
Nine ways to mitigate risk
Risk in the real estate investing world is not going away.
But there are some things you can do to mitigate your risks.
Our list of nine:
- The obvious one: get insurance.
- Hire the right people (don’t hire cheap; hire the best). Make sure your hires hit all three Cs: character, commitment, and competence.
- Educate yourself. Before jumping into a new market, get familiar with it. Jumping into an investment with no background knowledge is an unnecessary risk.
- Be self-aware.
- Have a strategy.
- Have the discipline to execute that strategy.
- Choose your partners carefully. You can’t have someone hitting the panic button every time something goes sideways.
- Know there’s not one right way to do things.
- Most importantly, THINK THROUGH every decision you make. Be a sober decision maker.
Risks come in two varieties: those inside your control and those outside of it.
You can’t obsess about the risks outside your control.
You CAN make the best available decision based on the risks you can control.
Think of yourself as a boat in the big ocean of economic activity. When you can learn to understand the tides and winds, you put yourself in a better position to navigate when it gets stormy.
You can’t mitigate a risk you don’t understand.
Our final note for today: embrace risk smartly, and great things can happen!
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